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21 February 2024

Daring investors put faith in Iraqi stocks

By Mohammed Aly Sergie


When we ask asset managers for investment advice, the answers are usually pretty banal. Some stocks, a portion in bonds and perhaps some alternative investments and emerging market exposure.


One European fund manager bucked the norm and set up a fund that almost exclusively invests in Iraq – and registered an impressive 25 per cent return in 2007.


Putting money into stocks in a war-torn country is not for the risk averse, and finding a manager to oversee a fund in such an environment does not come cheap. Bjorn Englund, managing director and founder of Luxembourg-based Godvig Capital Management, launched the Iraq-focused Babylon Fund in September 2006 with $8 million (Dh29.3m).


The fund evenly distributes its investments across companies listed on the Iraqi Stock Exchange (ISX), Iraqi bonds and Middle Eastern and Western companies that conduct business in Iraq. But Englund told Emirates Business he expects “to have 80 per cent of the portfolio in the Iraqi market by the end of 2008”.


For this exposure, Babylon’s fee structure is more hedge fund than mutual fund – Godvig charges the two per cent management and 20 per cent performance (in excess of eight per cent) fees. The open-ended fund now has $15m under management, with a minimum investment of $100,000. The investors are mainly Europe-based, who include a Scandinavian pension fund.


High net worth individuals with appetite for risk have also invested. “We saw the entry of one of the 10 richest people in the world last month, but only with $100,000,” said Englund.


The ISX, with a current market value of $2 billion, declined significantly in 2006 (as did most other markets in the Middle East) by 37 per cent, but gained 37 per cent in 2007.


More importantly for foreign investors, as security marginally improved over the past year, trading picked up as well. Volumes increased 250 per cent to $354m from 2006 to 2007. The value of these trades remain small by any standard – November last year was an especially busy month when a total of $52m was traded over 10 sessions.


With the lack of depth and transparency in the market, and the rampant corruption across the economy, Englund directs most of the fund’s capital into the banking sector, which represents about 75 per cent of the total market cap and the volumes traded in Iraq. Banks are also the “best regulated sector and have least corruption in Iraq”, he said, although he said there are a number of “really high risk banks” listed on the exchange.

Understanding these risks in an environment that lacks reliable information is what justifies the fund’s fees. “We have analysts on the ground based in Erbil,” Englund said.


The quality of public data is “pretty bad, and we do not know as many pieces of the puzzle as you will know in developed markets, however, we think we have enough to make an educated guess.”


The dearth of information is so entrenched that amazingly a large number of banks in Iraq do not even have websites and many main contacts at the banks use Yahoo! e-mail. But the sector and the Babylon Fund are doing fine.


Last year the Bank of Baghdad and Iraqi Middle East Investment Bank stocks, which the fund holds, rose 55 per cent and 39 per cent, respectively. Englund believes there is much upside in Iraqi stocks this year and expects to achieve similar gains for his fund. He will continue investing in the banking sector, and predicts Commercial Bank of Iraq (CBIQ) – with a cap of $60m – will double by the end of the year. Given that Babylon Fund doubled in size in 2007, perhaps Iraq is where the smart money will go this year.



Slow Improvements


The Iraqi stock exchange is open only for a few hours three days a week and it still does not have an electronic trading system. The exchange was closed for more than a year following the US invasion of Iraq. Under the Coalition Provisional Authority, as Rajiv Chandrasekaran revealed in his excellent book Imperial Life in the Emerald City, there was much debate and little action on how to reopen and develop the exchange, a task headed by a 24-year-old American real estate consultant.


The ISX eventually reopened with the bare minimum – the entire operation was little more than a building, some mobile phones and a blackboard. Improvements have been slow, but the market is attracting foreign investors, who direct more than 60 per cent of trading.